Buyer and Seller Closing Costs and the HUD-1 Explained

Whether I am working with a first time buyer or seller, I am always asked ‘What are typical closing costs for selling or buying a home?’

For buyers, a great deal depends on your down payment, and the day of the month you close the loan. There are less pre-paid costs towards the end of the month. With taxes, depending on the month of the year, you may be asked to escrow very little money for taxes, or up to 8 months.

For the seller, the costs are more predictable, except if you have agreed to pay closing costs for the buyer.

I have included a sample HUD-1 Settlement Statement, required by the government to document the costs when closing on a loan. The Department of Housing and Urban Development formulates a Settlement Statement or HUD-1. This HUD-1 Serves as your final accounting of all of the costs that are associated with your home purchase or sale. This document is required by law and should be given to your tax person the year you close on your home.This document is usually issued to you between 3 days to 1 hour prior to the closing. The law says you must have a copy 24 hours prior to closings. Depending on your lender and title company, this does not always happen. For this reason, I prefer to use the services of Stonebridge Title to make sure that we have the correct statements within 24 hours of the closing. They do a great job, and I always recommend their services for an uneventful and smooth closing.

Classic Title has been generous enough to prepare for you an example HUD-1 Statement (PDF) with an explanation provided by Terry Monnie one of Cincinnati’s best Real Estate Attorneys. You may find it most helpful to print out the HUD-1 and note the sections as you read through the blog article and its annotations. This is not a simple legal document to navigate on the screen.

The HUD-1 Settlement Statement Explained

General: The federal government through its various agencies requires (pursuant to the ‘Real Estate Settlement & Procedures Act (RESPA), that all 1-4 family residential closing transactions involving a lender utilize the HUD-1 Settlement Statement (HUD-1). This document is supposed to reflect the terms of the Contract to Purchase between the parties.

HUD 1 Explained:

There are two sides to the HUD 1, the left for the purchaser and the right for the seller and the second page reflects subtotals from Page 1.

Lines 100 and 400 reflect the purchase/sale price, and if you note, Lines 102 and 402 include “personal property”. Most mortgage lenders are very sensitive to having items of personal property included in a loan transaction since they are limited to making loans on real property alone. (Many contracts will state that even though the sale includes a stove or refrigerator, they will not be assigned any value)

Line 103 lists the total of all the “settlement charges” which are listed on the buyer’s side of Page 2 (total being shown at Line 1400).

Lines 106-108 will often show as owing by Purchaser and a credit to Seller for seller prepaid taxes or HOA fees as in this case.

Lines 120 and 420 reflect total sums owing by Purchaser and amounts owing to Seller. (Do you see the pattern-each side reflects the other in most instances to this point). What follows are credits to the purchaser and deductions to the seller’s side.

Line 201 is the earnest money paid by the Purchaser at the time of contract signing and this normally will be held by the Realtor, in this case, Amy Broghamer @RE/MAX Unlimited, in her broker’s trust account pending closing. At the time of closing, this earnest money deposit of $2,000 will be retained by the Realtor and the balance of commission will be taken from the Seller’s proceeds. (See Line 702 Seller’s side on Page 2)

Look at Lines 211 and 511. This is the tax proration credit section and arguably the most misunderstood portion of the HUD 1. Why? Because, in Ohio, taxes are paid in arrears and there are two tax bills every year, one half being paid as the December bill and the other half paid in June. (the time period to pay these bills will vary from county to county). Now’s the tricky part. Each tax bill, when paid, pays a tax period six months in arrears. For instance, the December tax bill 2006 pays taxes in arrears for the tax period, January 1, 2006, through and including June 30, 2006. Consequently, if the closing is 3-25-07 and the most recent tax bill has been paid (remember the December 2006 bill), taxes are only paid through June 30, 2006. Most contracts provide that the seller will give the purchaser a credit from the paid through date (6-30-06) through the date of closing (3-25-07) and that is what is reflected on Lines 211 and 511. Easy, huh? Now that this has been clarified I have to tell you that in certain areas of Ohio (Montgomery, Greene and certain parts of northern Warren County, the local practice is to use a “short proration” method) If you closed in those areas, the tax proration credit to the purchaser would only be the period 1-1-07 through 3-25-07. Your Realtor will be familiar with local custom.

Line 303 will then reflect the total owing by purchaser less any credits or the amount the purchaser will have to bring to closing. * A word of caution here. Under Ohio’s “Good Funds Law”, closing/title companies are not allowed to accept any sum in excess of $1,000 at closing unless it is in the form of a certified or cashier’s check. You may either make the check payable to yourselves and endorse it to the title company at closing or make it payable to the title company.

Note that on the seller’s side, Lines 500-519 reflect all the deductions from the seller’s proceeds with Line 502 being all the deductions from Page 2. (Line 504 shows the amount of the seller’s mortgage loan payoff, and keep in mind sellers, that most all loans are paid “interest in arrears” so your payoff will include the principal balance and accrued interest to the date it is normally received by your lender.

For instance, this seller paid their March payment, 2007, and because interest is paid in arrears, this paid the interest from 2-1-07 through 2-28-07. Accordingly, interest is still owed from 3-1-07 through the date the lender actually receives the payoff.

Keep in mind that title companies have to insure that adequate monies are collected for this purpose and the payoff will normally include 3-5 days of interest and your lender will refund the excess.

Also keep in mind that the payoff statement will not include a credit for any monies you may have in your escrow account. These monies are handled separately and will usually be sent to seller 2-4 weeks after the loan is paid in full.

one last thing in this regard and that is that Ohio law requires lenders to cancel their paid in full loans within 60 days of their being paid off. Few comply with the law resulting in thousands of uncanceled liens which may cause you problems in the future. Both Amy Broghamer, and Classic Title recommend that you insist that you get a copy of the cancelled liens for your permanent files.

Page 2 of the HUD 1 reflects the subtotal of all the purchaser’s closing costs and related charges and the same for the seller.

The 700 series for the seller reflects the total commissions paid to the Realtor, in this instance, Amy Broghamer at RE/MAX Unlimited. Please note that the actual check written to the Realtor in Line 703 will be the amount shown in this column less the earnest money deposit that Amy has already deposited in her broker’s trust account.

The 800 series will reflect the closing costs owing to the lender by purchaser and these should reflect the “good faith settlement estimate” that the lender is required to give to borrowers. There are normally variances in these numbers.

Line 901 will reflect the interest owing by purchaser from the date of closing through the end of the closing month. Then the first payment will normally be due the following first of the next month succeeding. Translated: Purchaser’s first payment will be due May 1, 2006 (interest in arrears).

If purchaser has agreed to or is required to establish an escrow account the initial deposit will be reflected in Lines 1001 through 1008. Direct your attention to Line 1008 “Aggregate Adjustment Analysis”, a fancy label for a mandatory test that lenders and title companies must perform to insure that the minimum amount is placed in escrow since the lenders don’t normally pay interest on escrow monies.

If Line 1008 indicates 0.00, this means the test was performed and the correct amounts were escrowed.

If Line 1008 reflects a negative number this means that the test results mandated that too much was placed in escrow and the adjustment was made to insure compliance with this regulation.

Lines 1100 through 1113 reflect all the closing fees, including such things as:

Settlement of closing fee

Title Exam

Title Insurance Binder: (this is the fee that is required for the title company to issue any title insurance policy, either for the lender or for a purchaser buying an owner’s policy. (See attached article on title insurance). In this instance, the Seller has agreed to pay $795.13 towards the cost of the Purchaser’s title insurance premium and this is reflected in Line 1108. The contract to purchase has provisions for seller to pay a portion, all or none of this important coverage.

The 1200 series reflects the charges imposed for the title company to deliver and record the deed and/or mortgage.

On the seller’s side, Line 1202 reflects the conveyance or transfer fee that is required to be paid to the County Auditor and is normally $3.00 for every $1,000 of sale price plus 50 cents for each parcel.

There will also normally be a $75.00 charge to the seller to the attorney who prepared the deed.

Home warranty payments will be reflected on Lines 1303-5 or alternatively on Line 507 on Page 1.

Line 1400 reflects the subtotals of all the charges for both purchaser and seller and will be carried forward to the Page 1.

I hope you enjoyed this detailed explanation of the HUD-1 Statement by Terry Monnie. As we near the closing table for your sale or purchase, I will be talking with you regarding the HUD-1 for your property. In addition, the good people at Classic Title do an excellent job explaining this in a very similar way at the closing table, or prior to that via phone conference if you have questions, or think you may need a brush up before going to the closing table. As your Realtor, I review this as well to make sure that your Earnest Money has been credited, that any Home Owner Warranties, or Closing Costs that we negotiated being paid by the other party have been noted, and any other adjustments made in the contract were completed.

I hope this gives you SELLERS an idea and a method for calculating what your closing costs can be expected to be.

If you are a BUYER, your lender should issue you a Good Faith Estimate with an idea of what these closing costs will be when you make application for your loan. This is a requirement, and you should ask for a Good Faith Estimate if your lender is not providing one for you. This is only an Estimate and may change a bit from time to time as you wait for your loan to close or to lock in your rate.

To Contact Terry:
Terrance R. Monnie, Attorney at Law
Stonebridge Title
513-671-9600 or Terry@Stonebridge-title.com